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24. Nov 2022 | Markets & Companies

The raw material game: part II

Jorge Prieto, 3P - International Coatings Consulting

An overview of the current market situation.
An overview of the current market situation. By Jorge Prieto, 3P - International Coatings Consulting.
The current global economic outlook is showing signs that the world economy could be on the verge of a new crisis even as it is still recovering from the pandemic.
Source: christian42 _stock.adobe.com
The outlook for 2022 was more confident again for the bulk of coatings manufacturers after it had been thought that the Covid-19 pandemic had been overcome and that the worst was over. However, the war in Ukraine has turned the fragile global recovery on its head, triggered a devastating humanitarian crisis, driven up food and commodity prices, slowed global growth, and exacerbated inflationary pressures around the world. From one day to the next, Ukraine – a reliable raw materials supplier of important basic chemicals such as ammonia, titanium ore (ilmenite) and sulphuric acid – was gone, and that further aggravated the raw materials situation in the global coatings and chemicals industry. Ammonia’s importance to the coatings and raw materials industry should not be underestimated, as it is used to produce urea, nitric acid, hydroxylamines, amines, hydrazine and nitriles – all of which are also major precursors for coatings raw materials. In addition, ammonia, the basis of nitrogen products, is directly dependent on natural gas for its manufacture. Already, initial price increases for nitrogen products of more than 40 percent have been reported. In addition, the situation is being made worse by numerous global force majeures that have been declared on basic chemicals. For example, in March 2022, BASF Petronas Chemicals (BPC) announced force majeure for shipments of its acrylic acid and acrylic esters from its production facilities in Gebeng, Kuantan, Malaysia. In May 2022, Celanese Corporation declared force majeure for all its acetyl chain and acetate tow products in the Americas and EMEA regions. This affected vinyl acetate (VAM), ethyl acetate, acetic anhydride, and subsequently cellulose acetate and various emulsions of these chemicals. It probably stemmed from the reduced availability of acetic acid, which is the essential precursor for all these basic chemicals. Shortages of methanol, a precursor for acetic acid production, are also conceivable.

In addition, the war in Ukraine has further increased the pressure on supply chains. So far, it has led to a shortage of some 100,000 Ukrainian and Russian truck drivers in Europe. Added to which, cargo airlines are having to accept longer routes because Russian airspace has been closed, a fact which has led to extremely high cost increases. To blame everything on the war in Ukraine alone is to see things too simply, however. The situation was exacerbated by the strict “zero-Covid strategy” and numerous lockdown measures, and shows just how dependent the chemicals industry now is on China. The result was the weeks-long closure of the world’s largest seaport, which is in Shanghai and through which more than twenty percent of Chinese exports are shipped, as well as the shutdown of countless foreign and domestic factories. The combination of war in Ukraine and supply chain problems from China contributed to a significant collapse in industrial production. The watershed proclaimed in political circles in Western countries is currently leading to a fundamental rethink within most companies in the coatings and chemicals industries. Nothing will ever be the same again. We in the chemicals industry find ourselves in a phase of utter upheaval. Companies should review their current business models as quickly as possible and develop new strategies. The upheaval is being intensified by the European Green Deal, the first step of which seeks to reduce greenhouse gas emissions by at least 55 % by 2030 compared with 1990 levels. The second is to reduce net greenhouse gas emissions to zero by 2050 and further promote the circular economy in Europe. If these goals are to be achieved, most companies in European industry will have to transition their solvent-based product portfolios to eco-friendly paint technologies and coating processes within a short period of time and forge ahead with the increased use of renewable energies. The coatings and chemicals industry faces very significant challenges, but these are necessary for the survival and growth of the industry.

You can read the full version of this article  in the September issue of the European Coatings Journal.

Logistics

Before the outbreak of the Covid-19 pandemic, distance and transportation were not an issue when it came to building up global supply chains. They were an integral part of many companies in the coatings and chemicals industries in Europe. In the current situation, these companies need to realign their raw materials strategy for the future. Severely congested transportation facilities for air cargo and sea containers as well as delivery delays caused by government-imposed lockdowns in China led to a further increase in transportation tariffs in 2022. As a result of the enormous cost of energy and fuel, increases in freight costs of 30-45 % have been announced for ocean freight shipping in the third quarter of 2022. In addition, climate change is expected to increase the likelihood of extreme weather-related disruptions to global supply chains.

Transportation capacity for non-chemical products by rail on the Silk Road has been shifted to ships due to the risk of blockading by Russia. This will take away capacity from sea containers for basic liquid chemicals, which are not allowed to be transported by rail on the Silk Road. Shipping carries ninety percent of world trade and is responsible for about 3 % of global CO2 emissions. In 2021, a total of 5,434 container ships were engaged in international maritime trade. The cost of ocean freight is expected to keep rising in the coming years, as the International Maritime Organisation agreed in June 2021 to new watered-down regulations aimed at cutting carbon emissions by eleven percent between 2023 and 2026. From 2023 on, all ships engaged in international trade will be placed in different categories and will have to apply for an international energy efficiency certificate (Carbon Intensity Indicator) at the time of their first survey. The purpose of this is to raise the pressure on shipping companies to use efficient ships only. Older ships will have to undergo costly retrofitting. Otherwise, they will only be permitted to operate at lower speeds, so as to reduce CO2 emissions. By way of incentive, the ships with the lowest emissions will pay lower port fees. These measures will inevitably raise logistics costs even further. In addition, inland shipping in Europe has been somewhat curtailed by the recent heat wave, as water levels have fallen more sharply this summer. Some freighters are only able to carry half their usual loads. The Rhine is an important lifeline for the German chemicals industry situated along its banks. Chemical and industrial companies have therefore already started switching to rail and truck capacity. This will possibly give rise to further shortages / cost increases relating to transport capacity.

Decarbonisation and sustainability

As a result of the pandemic and other disruptions over the past two years, coatings executives focused in 2021 primarily on maintaining their supply chains and retaining key employees, as well as recruiting skilled workers to fill gaps in production, labs and purchasing. Sustainability seems to have suffered somewhat somewhere along the way. However, European consumers in particular are paying more attention now than in the past to the carbon footprint generated during the manufacture and transport of products. The coatings and chemicals industries, along with ocean freight companies, are coming under renewed pressure to manage and reduce their greenhouse gas emissions. There is a clear trend among coatings manufacturers to increasingly request product carbon footprints (PCFs) before purchasing aqueous polyacrylic emulsions and other raw materials, for example. The PCF captures the CO2 emissions generated by a product or service from raw materials to manufacturing through to delivery. The chemicals industry and coatings manufacturers need to pay more attention to the carbon footprint of their raw materials and coatings formulations. It may be assumed that, in the foreseeable future, the carbon footprint will play a prominent role in the selection of raw materials in the course of coatings development. Already, raw materials sourced from Asia are being scrutinised more than usual. Some reputable chemicals companies have stopped using raw materials from Asia in an effort to reduce the CO2 footprint of their products / formulations.

Commodities

Heavy sanctions continue to cripple trade between Russia and the West, as a growing number of companies have been forced to cease operations in Russia. The Russian invasion of Ukraine is impacting all commodity markets. Rising prices for crude oil and key commodities are increasing the cost pressures on all petrochemical and chemical products around the world. Europe is being hit particularly hard by the rising price of natural gas – the chemicals industry’s main energy source – compared to cheaper energy stocks in North America and more diversified and cheaper energy sources in Asia (coal and fuel oil). The unusual volatility in the commodity markets is causing companies to review contracts for key commodities, chemicals and polymers in Europe. Delivery contracts that did not include energy clauses for 2022 are being forced to impose energy surcharges or price hikes. The high energy prices are threatening the already weak growth of the European economy and future demand for commodities. Producers of caprolactam (a capping agent for polyisocyanates) have already implemented price increases of between EUR 1,000 and EUR 1,300/tonne for second-quarter deliveries, up more than 35 % over the previous price. This pressure will therefore be passed on to the downstream industries. On the other hand, numerous coatings manufacturers are accusing the supply industry of raising their prices excessively. Leading managers from the coatings industry fear that commodity suppliers could be exploiting the situation so as to maximise their profits. They believe that, in raising prices above the level of cost increases, sectors of the industry will drive up the high inflation rates even further.

Titanium dioxide

In the wake of the extreme price increases in recent years, titanium dioxide is now the “white gold” for the coatings industry. Global consumption of titanium dioxide in 2021 ran to about 6.6 million tonnes, worth approx. EUR 27 billion The largest consumer of titanium dioxide, accounting for 56 % of this amount or 3.7 million tonnes, is the paint and coatings industry. In 2020 / 2021, global production capacity for titanium dioxide was about 8.5 million tonnes. The bulk of that capacity is distributed across Asia-Pacific, North America and Europe, with Asia-Pacific being the leading region in terms of the global market capacity for titanium dioxide. Since 2016, production capacity has accounted for more than 50 % and reached nearly 59 % in 2021. China has the largest production capacity for titanium dioxide in the world.

Challenges: The volatility of titanium dioxide costs

Recently, there has been increased volatility in titanium dioxide prices, with huge variations occurring in the prices of basic raw materials, such as ilmenite and rutile. Titanium dioxide manufacturers claim that not only volatile raw materials prices and rising energy costs but also shifting import and export regulations along with stricter environmental protection requirements are leading to higher sales prices. All these regulations are restricting the production of titanium dioxide in many regions and further affecting the growth of the titanium dioxide market. Moreover, these manufacturing processes are energy-intensive. Both the chloride and the sulphate processes have a substantial impact on the environment, with chloride technology being the gentler of the two. Comparison of both processes shows that the chloride process generates less waste, requires less energy, and is less labour intensive than its sulphate counterpart. The onus is on titanium dioxide manufacturers here to make their processes even more eco-friendly.

Global market development and Chinese titanium dioxide producers

The growth of the market for inorganic titanium dioxide pigments is primarily being driven by the growth of the global construction industry. The Chinese titanium dioxide industry more than doubled its total production, from 1.47 million tonnes in 2010 to approximately 3.51 million tonnes in 2020 / 2021. China has been and continues to be partly responsible for the price cycles witnessed over the last decade. Shifts in market share outside China are closely correlated with domestic demand and capacity utilisation inside the country. Exports of titanium dioxide from China are increasing year by year and may further accelerate the closure of foreign production of titanium dioxide by the sulphate process. The latter process dominates titanium dioxide production in China, with an 85-86 % market share. The chloride process has so far failed to spread significantly in China because it is more difficult to control and there is a lack of know-how. Currently, only a few companies in China deploy it, such as Lomon Baili, Jinzhou Titanium Industry, and Yunnan Xinli, which was acquired by Lomon Baili in 2019. It is estimated that some 12-15 % of total titanium dioxide production in China comes is chloride based. In contrast, the chloride process accounts for more than 40% of global titanium dioxide production. Depending on the titanium mineral raw material employed, the sulphate process requires 2.4-3.5 tonnes of concentrated sulphuric acid (H2SO4) per tonne of TiO2. The importance of sulphuric acid is often underestimated, even though globally it is the largest-volume chemical in terms of production and the most widely used. It is a key product for the chemicals industry and finds direct or indirect application in almost all chemical processes. More especially, it is essential for basic processes. Many products cannot be produced without the use of sulphuric acid or, if so, only at much greater expense. In 2020, the global market for sulphuric acid was almost 260 million tonnes. Chinese production of titanium dioxide by the sulphate process is suffering from fluctuating commodity prices on the global sulphur market, as China depends on sulphur imports from major exporting countries such as the United Arab Emirates, Iran, India, Qatar, India, and Russia. Therefore, any change in the price of sulphur on the international market directly affects the price of sulphuric acid and thus the price of titanium dioxide. Global producers of titanium dioxide will likely invest more in the chloride process for producing titanium dioxide. The sulphate process is on the decline. Global expansion currently underway on the part of Chinese titanium dioxide producers may lead to the closure of global production sites. Here, titanium dioxide producers should be aware of their importance to the market and should take timely action to remain competitive.

What can coatings manufacturers do?

Where technically feasible, titanium dioxide should be eliminated, or its use concentration reduced to an acceptable level. Our 2022 analysis of titanium dioxide savings in the coatings industry shows considerable potential for average savings of 15-20 %, without serious impairment of performance. At most and to an extent depending on the application, we identified that there is scope for eliminating as much as 70% titanium dioxide from formulations. This translates to annual global savings of 550,000 - 740,000 tonnes of titanium dioxide and potential annual savings of EUR 2.0 - 2.8 billion for paint and coatings manufacturers.

Outlook

The duration and consequences of the current Covid-19 and energy crisis are not yet foreseeable. But it is certain that we will overcome this crisis and emerge from it stronger. Apart from the current challenges, we are facing profound structural change and a realignment of the global economy and supply chains. But it is not just about overcoming the current crisis. Companies in the chemical and coatings industry will have to re-orient and, in some cases, reinvent themselves. In addition to raw materials availability, dependence on global raw materials suppliers is coming under scrutiny. Geopolitical factors are also playing a growing role. Large chemical concerns such as Henkel have already responded to the crisis by merging their business units to create leaner structures. They are hoping to achieve synergistic effects that will enable them to respond more agilely and, above all, more flexibly to changes. Companies in the chemical and coatings industry should prepare themselves more intensively for future crises and strengthen their resilience, for example, by diversifying their sources of raw materials and their coatings formulations. At the same time, they should slash the number of raw materials used and so reduce complexity. Resilience is the ability to survive difficult market situations without lasting impairment. Numerous coatings manufacturers are also toying with the idea of buying into raw materials supply chains so as to better secure raw materials supplies in the future. The acquisition of Specialty Polymers, a manufacturer of aqueous emulsions, by Sherwin-Williams at the end of 2021 is one such example.
EC Techb Report Sustainability

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EC Tech Report Sustainability

Making coating systems more environmentally compatible is a burning issue for everyone in the industry, and one that is being fuelled by the European Green Deal. Learn all you need to know about sustainable coatings, how to produce coatings in a more environmentally friendly way and how to give coated products a longer service life. You will find an overview in the EC Tech Report of the many various approaches being adopted. We will dive deep into the European Green Deal, its key points and main purpose as well as consequences for the coating industry, see which new raw materials are being developed to replace or lower the content of products in the SVHC group and learn about different approaches to sustainable paint formulation.

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